Finance & Investment
Predictions About the New Normal in Sustainable Investing Post-COVID-19

Many investment firms are modifying their strategies and valuation models over the long term in the wake of the pandemic. Over the next 12 to 36 months, the
following six mega-trends promise to reshape the business practices and investing.

In John Lennon’s last album in 1980, he released the song “Beautiful Boy;”
which showcased his deep love for his son, Sean. The song included the prophetic
quote, “Life is what happens when you are busy making other plans.” As we
struggle to bring into focus the long-term impacts of a post-COVID-19
world,
Lennon’s quote is a poignant reminder of the uncertainties that lie ahead for
corporate sustainability executives and investors.

We are now approaching an inflection point in the crisis, where savvy investors
are fundamentally reassessing economic, environmental, social and governance
factors to adjust to the new normal. Many investment firms are modifying their
strategies and valuation models over the long term in the wake of the pandemic.
Here’s my perspective on how astute investors can equip themselves for a
volatile future by determining whether the companies they hold are future-fit.

Current state of play

According to Morningstar’s Jon
Hale,
funds that integrate environmental, social and/or governance (ESG) factors
registered record growth in Q1 2020 that eclipsed the previous watershed moment
in Q4 2019. “Sustainable funds in the United States set a record for flows in
the first quarter [of 2020],” Hale wrote. “ETFs, passive funds and iShares
dominate as US ESG funds gather $10.5 billion in the first quarter.”

What’s more, anecdotal evidence suggests that ESG-attuned funds were sticky and
held their value relative to their benchmarks. This early signal bodes well for
sustainable investors and could serve as a proof point for how investors can
trust ESG funds in turbulent markets.

Many investors are now reimagining the future state of investing in the
aftermath of the pandemic. Important considerations come into play in preparing
for the future, such as: What does the US government’s current response to the
crisis portend for the economy over the next three years? How do we know if a
company is resilient and positioned for growth over the long term? And do we
have the information we need now to evaluate companies’ long-term performance
outlook?

Predictions for the future: Emerging mega-trends in the US

Over the next 12 to 36 months, the following six mega-trends promise to reshape
the business practices and investing:

1. Record deficits squeeze companies that rely on government procurement

In 2021, political and financial market pressure for deficit reduction will mount as markets adjust to the economic realities resulting from the record stimulus. This will adversely impact companies that rely on government funding as budgets are slashed in an effort to stabilize the economy.

2. Inflation roars as a result of the unprecedented global stimulus and quantitative easing

Earlier this month, the first wave of COVID-19 stimulus and quantitative
easing surpassed $2 trillion — three times the amount of the 2008 financial
crisis bailout and more than five times the amount of President Obama’s
2009 stimulus. The likely result of the most extensive bailout in US history
is that inflation rates will soar, perhaps eclipsing 10 percent, similar to
what the US experienced in the early 1970s. Companies that are unable to
adapt quickly to inflation will be adversely impacted in this new economy.

3. Commercial real estate bubble emerges as a result of record levels of small businesses closures

One prominent economist reported that bars in the US had, on average, enough
cash cushion to sustain closure for only 22 days. And as of today, over 50
percent of all stores in the US are closed. Government support will help,
but will not be enough or come fast enough to prevent a commercial real
estate bubble in the US. What’s more, the growth of online shopping will
continue to accelerate, exacerbating pressure on brick and mortar commerce.

4. Unemployment hovers around 10 percent for a sustained period

In mid-April, unemployment claims jumped again as the COVID-19 infection
rate reached 22 million, which is more than the total number of jobs created
over the last ten years. This translates into an unemployment rate of
approximately 16 percent. The unemployment rate should come down to level
off at around ten percent within twelve months, but we are in for a period
of sustained high unemployment rates for the foreseeable future.

The recent $2 trillion stimulus also includes a $500 billion bailout for
companies that were hardest hit by the pandemic. Many progressive thought
leaders such as American Prospect’s David Dayen objected to the
bailout on the grounds that these corporations wouldn’t need it if they
hadn’t “squandered their record-high profits on payouts to CEOs and
shareholders.” As a result, a new way of thinking is emerging that is
transforming the way we value a company’s relationship with nature, people,
society and shareholders. This ‘capitals
thinking’
approach is being championed by the Capitals
Coalition (the Natural Capital
Coalition and
the Social & Human Capital Coalition
come together); and aims to reshape how investors engage on corporate
governance and value the relationship between commerce, people and nature.

6. Sustainable (ESG) Investing becomes the new normal in the US

Within 36 months, there will no longer be a discernable distinction between
sustainable and traditional investing. As sustainable investing continues to
scale and become infused in the Main street and Wall Street, high-quality
investment managers will utilize multiple capitals
thinking
and integrate financially material ESG considerations in engagement
strategies and investment decision-making. This will be the silver lining of
the crisis.

Call to action

Collectively, these mega-trends — each with a distinct but linked role in the
emerging investment landscape — will:

Transform the way corporate sustainability information is utilized by
developing new disclosure expectations for material sustainability
information and value-generating strategies based on existing standards;

Reposition corporate reporting to tell a more complete story of how an
organization’s strategy, governance, performance and products lead to the
creation of value over the short, medium and long term through a multiple
capitals prism;

The time has passed for small commitments, hyperbole and delays in embracing
sustainable investing — now is the time for leadership, investment and action.
Companies and investment managers that remain on the sidelines will sacrifice
their opportunity to shape their own, and the planet’s, future.